How China’s Crisis and Inflation Could Affect Australia’s Economy

China has tried to destroy Australia’s economy in the past, but this time there is a combination of factors that are even beyond Beijing’s control.

In the years since the global financial crisis first hit Australia’s shores in 2008, the story of Australia’s economic performance has been inseparable from the success story of China’s industrialization.

Seemingly like clockwork, whenever the Australian economy began to look like its luck was finally about to run out, another industry flourished in the Middle Kingdom or a Chinese government stimulus program inadvertently ran to the Lucky Country’s rescue.

While it may not have been as apparent as it was in the late 2000s, Chinese demand for Australian bulk commodity exports it has once again come to Australia’s aid in the two years since the pandemic began. Despite Beijing’s attempts to hit the Australian economy Time after time through punitive trade actions, China’s insatiable appetite for iron ore and coking coal saw them once again significantly boost Australia’s fortunes.

Between April 2020 and May 2021, the price value of Australia’s largest export iron ore tripled, providing a huge boost to the economy and a hard hit Treasury bank balance.

But as a series of global challenges, including those stemming from the war in Ukraine, slowly become clearer, an important question is emerging: will Chinese demand for bulk commodities be there to cushion Australia’s slump the next time the US slumps? things start to go wrong?

Existing challenges

As the war in Ukraine continues, it is increasingly easy to see the challenges facing the world through the lens of the impact of ongoing conflict. But even before the first Russian tanks crossed the border on February 24, a number of different indicators already pointed to tough times ahead.

Worldwide, fertilizer prices were heading toward all-time highs, with some regional indices reaching price levels similar to those historically associated with contributing to social unrest in 2008 and the Arab Spring movement in 2011.

In China, cities continued to go in and out of lockdown, as Beijing continued its ‘Covid Zero’ strategy to tackle the virus by using some of the strictest movement restrictions in the world.

As anyone who has been to a supermarket or gas station, even before the war in Ukraine, will tell you, the cost of living was already taking off globally before the first shot was fired.

In the US, annual inflation reached 7.9%, its highest reading since the early 1980s. In Germany, cost pressures facing manufacturers reached the highest level since 1949, defined by the aftermath of World War II.

With inflation returning with a vengeance after spending decades largely contained in much of the developed world, central banks around the world have quickly moved from accommodative monetary policy designed to combat the pandemic to rapidly raising interest rates.

And then things got worse

Since the war in Ukraine began, these challenges have expanded significantly, in particular the issue of food security, which has become an issue at the forefront of world leaders’ concerns.

French President Emmanuel Macron warned last week that “we are entering an unprecedented food crisis.”

“The war in Ukraine makes it impossible to plant [seeds] it takes so much and is creating a situation that will be even worse in 12-18 months. This situation will create a food crisis and serious humanitarian situations in many countries, surely with massive political consequences”, he said.

Earlier this month, Chinese President Xi Jinping warned the People’s Political Consultative Conference that China cannot rely on international suppliers to ensure China’s food security, noting that “Chinese people’s rice bowls are full of grains.” Chinese”.

Chinese problems

While inflationary pressures and problems with food security are likely to hit developing nations hardest, the world’s most populous nation will also face some significant challenges as it tries to feed its huge population while maintaining his run of financial success.

With several major Chinese cities currently under lockdown, including the mega-metropolis of Shanghai, affected households and businesses face an uphill battle amid slowing growth within the Chinese economy.

According to recent data released by the Chinese government’s National Bureau of Statistics, the non-manufacturing sector is currently experiencing only its second contraction in the 15 years since records began.

Meanwhile, the Chinese real estate sector’s woes have continued with real estate think tank China Index Academy reporting a 49.1% year-on-year drop in total home sales by floor area in March, a drop significantly larger than the drop year-on-year of 23.4% registered in February. .

China woes may drag Australia down

If the war in Ukraine and all its accompanying problems drag on, Beijing will need to devote an increasing proportion of its resources to ensuring that food prices remain affordable and to support households and businesses with the impact of rising prices. of costs.

Some important steps towards these goals have already been taken in recent days, with the announcement that Beijing will allocate 1 trillion yuan ($210 billion AUD) in VAT refunds to small businesses, self-employed households and general VAT payers across the globe. the sectors.

A meeting of the State Council led by Premier Li Keqiang on Wednesday called on the nation to prioritize stable growth and draw up contingency plans to deal with possible greater uncertainties, according to Chinese state media.

While stimulus programs may benefit Australia in the short term, in the form of increased demand for bulk commodity exports. In the longer term, the more resources spent supporting households and businesses, the less there will be for traditional Chinese growth engines like the construction sector.

Although the problems in Chinese real estate have largely calmed down in terms of broader media coverage, those problems have not gone away. Behind the scenes, the situation continues to deteriorate for many large developers, including mega-developer Evergrande, whose obligations are nearly double Russia’s total sovereign debt.

Whether China will continue to ride to the Lucky Country’s rescue amidst these rapidly evolving challenges remains to be seen, but it may be a circumstance the government will have to grapple with in what is shaping up to be a difficult next parliamentary term.

Tarric Brooker is a freelance journalist and social commentator | @Avid Commenter

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